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Friday, 19 July 2013

Foreign Direct Investment - The Third Invasion on India

Once upon a time, some writings say, the major chunk of the earth was called the "Bharatvarsha" and from then, we kept losing the land each day and today, we have been reduced to a minuscule of what we used to be.

Around the year ~1000, Mahmud Ghazni invaded several parts of India several times to take control of all our agriculture produce including fruits, cereals and sugar, and exported them to other parts of the world, especially the Middle East. Several Indian kingdoms were conquered and we were left helpless. Such was the confidence that Ghazni that he vowed to raid India every year and exploit all the wealth that this great country had. In a way, we were responsible for this. After all, nobody can sit on us till we let them.

Around the year ~1600, the Britishers entered India through the East India Company route. It was such an easy task for them to lure our rulers with gifts and promises of wealth. Our leaders who we trusted to lead us in the right direction sold us for their monetary benefits and soon, the Britishers were ruling us. For whatever little money that they gave, they reaped several times of it as benefits for ruling us for hundreds of years.

Around the year ~1990, a similar situation came up. It was around 40 years since India got Independence and was fighting to move up as a nation. Just then, we thought we need to accelerate the pace of our growth. We needed more money. We decided to liberalize our economy, privatize businesses and globalize our reach. The idea did wonders and we started racing ahead with the so called growth. The numbers became bigger, the balance sheets become larger and reach became wider. One must always understand that while debt makes us responsible due to a commitment for repayment as our assets are at stake, equity makes us careless as our assets are already somebody else's. When the equity in us gets sold to somebody else, we are selling a part of us on which we won't have any further. The moment we allow more than half of us to be controlled by others, we are no more we. We become the others.

If Mahmud Ghazni invaded India to loot all the precious stuff we had and the Britishers invaded us and ruled the hell out of us, the Americans are in the process of invading Mother India and own her forever. We, the sons of India, are primarily responsible for all these invasions on us and more for the one that is in process. FDI should be used as a source to accelerate growth and not as a means to sell ourselves.

The Third Invasion on India

In those days, the assets that we had were agricultural produce, gold, diamonds, land and people. These days, the economy's progress has resulted in to aggregating all our assets into companies and these companies get listed on the stock exchanges. The ownership in these companies gets traded electronically through shares. So, if a nation has to invade us, how do they go about? They can't declare a war on us considering there are organizations like the United Nations who would not approve of such steps. Buying shares of a company is as good as buying ownership in the industrial activities of a nation. Considering the modern world is tremendously dependent on industries and industrial products, the ideal way to invade a country would be to invade its industries. As we open up 100% FDI investment aka ownership of several sectors, we are forgetting the fact that we are up for a sale and the cost of this would be infinitely high.

Do we really need FDI?

YES. Period. The question is how much? It always reminds me of those kings who agreed to sell us for paltry sums to the Britishers when our Government announces that FDI in a particular sector has been raised to 100%. While the statement that the world wants to participate and help in India's growth was valid about 10 years ago, I personally do not consider it valid anymore. There is no real reason that can justify allowing a foreign entity to hold more than 49% of stake in any of our companies. The ideal FDI investment that ensure synergies of technology, growth, participation, profits and socioeconomic welfare is 26%. Observe any industry with a higher FDI, it would either be in chaos, which is often self created to ask for a higher FDI limit, or greed would have taken pricing sky high making products of such companies unaffordable for people. People pay for certain products from their sweat and for some from their blood. As FDI increases, the products move from sweat to blood. For example, education and healthcare facilities are charged at rocketing prices courtesy the foreign technology. While it does good in several ways, it does bad in several more ways.

The fall of the rupee and the relative poverty

According to most credit rating agencies and fund managing firms, India's future is bright. However, the present is worse. It has remained this way from the last 8-10 years. We have always said that we will grow at 5-6% this year but we will grow at 10% after 3-5 years. Those 3-5 years don't seem to have come. In a ways, when we say that our present is uncertain, we are available cheap. India's sovereign rating too is a paltry number. It thus becomes an easier task for a foreigner to buy us out because we are more willing to sell out. It is we who make the rupee weak and the dollar rich. It is we who make Uncle Sam rule us. Nobody is better than us but it is we who subconsciously believe that the west is superior to us. Even a jerk dampens our economic sentiment while even a small pick up in the US makes us happy. The rupee's fall from Rs 50 to Rs 60 means that the dollar can buy 20% more shares at the same amount of money, thus accelerating our sell out. We become relatively poorer as we have to shell out more rupees to pay off our loans from the international organizations as they are quoted in dollars. At 10% on $100, they continue to get $10 as interest while for the Rs 5000 on which we were paying Rs 500, we pay Rs 600 now. This makes India a relatively poorer nation, higher debt in rupee terms, lower repayment capacity and thus, our credit rating falls further leading to even more fall in the rupee's value. It all started with our invitation for the foreign capital, greed to get rich quick and in the process, get caged for a lifetime.

Make India attractive for Indians before attracting foreigners

A recent survey claimed that more Indians are willing to migrate to the US, given a chance, than ever. This is more than any evidence that the native Indians have started to dislike their native. The theory that we upgrade from villages to towns, towns to cities, cities to metros and metros to foreign destinations has had a large impact on the emigration mentality of Indians. When your family members do not want to live with you, why do you buy a home? We must join hands to make this country a great place to live in for ourselves. The others will follow suit. The US doesn't invite anyone to their nation but everybody aspires to go there because, in the past, some visionaries built the nation in such a way. It is time for us to build our nation in a similar manner. Whose nation is it after all?

Is deficit weakening rupee or rupee weakening deficit?

The debate will always continue whether the it was the egg or the chicken. A similar debate is whether our economy's downfall is cause the fall in the rupee or it is the fall in rupee that is causing the economy's downfall. There are arguments on both sides that are equally valid. When the debt to be repaid is high, the fall of the currency has a major effect on the economy as the economy bleeds cash to repay the debt. The currency rise helps in making debt repayment easier.

Capital Markets - Who owns them anyway?

India is now running a record current account deficit, uncertain inflation, confused corporate indicators and of course a political saga that is so very much a part of our lives. While we are under so much struggle, the foreigners have continued to buy us in the last many years. In 2012 alone, around $25bn was invested into the Indian equities. Why would anyone buy a falling nation like ours? Falling because the numbers indicate that way. We have always maintained that our present is not good. An analysis of shareholding pattern reveals that FIIs now hold around 38% in the free float market cap of the BSE100 index. This has been only rising over the last several years. So, who owns the capital markets? Who can cough and make India catch cold? Even a little uncertainty in such times leads to vast devastation and erodes our market cap severely. The next day, we always see that there is even more investing interest in the market for the foreigners while the domestic investors seem to lose interest each day. The retail has clearly expressed its dislike for the stock market as the retail trading volumes on the bourses are at an all time low. The AUM size of the mutual fund industry has remained stuck at Rs 7-8 lac crores over the last several years.

Up for Sale

There are several estimates on the wealth of our leaders which may or may not be true. It doesn't hurt to see someone getting rich but it does hurt to see someone getting rich at the cost of someone else's life, more so if it is at the cost of the citizens. Apart from those speculations, the facts suggest that those companies which we names as Navaratna, Maharatna, etc. are now bleeding for various reasons. We have Air India, BSNL, MTNL and the likes going through turmoil. A 100% FDI in telecom, aviation and defence procurement are more a cause of concern than an advancement for us.

The Cost of Buy Back

We all understand that the price of buying back something that we lose is infinitely high. In fact, we might never get back what we lose, in most cases. Speaking from the stock market front itself, companies are able to buy back shares from investors only at a huge premium. The cost of buying back a nation is a something that we can not calculate because it would not be about currency notes, it would be about battle, about life, about another Satyagraha, about all factors except money. Money loses its value after a certain level when other factors come into play.

Next is What?

What lies ahead to us as a nation is something that we can only speculation up on? Speculation and stock markets are two major distractions that have corrupted the science/art of investing. As Indians, it is our duty to ensure that we take right decisions in the interest of the nation. Unfortunately, the leaders do not seem to have the nationalist spirit anymore and in such a scenario, a nation goes in to chaos. The fact that Indians are far more understanding, strong and thoughtful has ensured that we do not end up in a mess like in other nations. We have been quietly everything that has been happening and it is time for us to speak up and join hands to lead this nation in the right direction. The leaders should take a holistic view of the situation, think about the possible results that their decisions can bring in the long run and consider the welfare of the nation and its people above everything else. The focus has to be on the future because we are obsessed with the point that our present it not good. If the sale of Indian stocks continues this way, the time is not far when we could be in a situation similar to slavery and this might go on forever because we would never have that kind of money to buy back our freedom.

Disclaimer: Everything written above are my personal thoughts and opinion. They have nothing to do with anyone or anything, dead or alive, for any reasons. Images used in the blog are subject to copyrights of the owners.